Financial markets, including stocks, bond prices and the rupee, fell on Monday after Urjit Patel was named as the next Reserve Bank Governor, who is likely to adopt a hawkish stance of not cutting the rates in the near term and is expected to continue with the aggressive clean-up of bad debts of banks.
After starting on a higher note at 28,088.07, the Sensex touched the day’s high of 28,143.28 amid sustained foreign fund inflows. However, the index later slipped into a negative terrain to slip below the 28,000-mark and touched a low of 27,918.05 before winding up at 27,985.54, a fall of 91.46 points or 0.33 per cent. The NSE Nifty also remained under pressure for the better part of the session and finished 37.75 points, or 0.44 per cent, down at 8,629.15. Intra-day, it shuttled between 8,684.85 and 8,614.
The benchmark 10-year bond yield rose 5 basis points to 7.15 per cent and prices declined in the money market. On the other hand, the rupee lost 14 paise to close at fresh one-month low of 67.19 against the US currency on increased dollar demand from importers and banks amid weak equity markets. The US dollar was firm against global currencies in overseas markets on rising prospects for a rate hike by US Federal Bank, which hit the rupee sentiment. The market also turned cautious over the upcoming redemption of the FCNR-B deposits, even though RBI has reiterated its commitment to provide enough liquidity.
Investors expect Patel to keep the repo rate on hold at the RBI’s next policy review on October 4 after inflation accelerated to 6.07 per cent in July, above the RBI’s near-term target of 5 per cent.
“Patel is known for his hawkish view on inflation and his appointment is viewed as a signal from the government that there will be continuity of the central bank’s policies,” said Shreyash Devalkar, fund manager, BNP Paribas Mutual Fund.
Vinod Nair, head of research, Geojit BNP Paribas Financial Services, said: “The market fell, rupee weakened and bond yield rose amid the announcement of the new RBI Governor. The market believes that the prospect for a rate cut in the near term is unlikely as the priority will be to contain inflation. The market has entered into the expiry week while the lack of triggers will keeping the market to trade in a linear way. Global market was volatile on concern over interest rate hike due to contradictory statement from the US Fed officials and the minutes.”
According to Saravana Kumar, CIO, LIC MF, Bond markets should see some initial sell-off and till the next policy meet it should trade in the range of 7.15-7.20 per cent. “This sell off is mostly because markets has been expecting a more dovish Governor. Further sell-off in bonds is not in the making as we expect liquidity to be comfortable even if the FCNR (B) deposits near maturity as it has been continuously reiterated by Rajan that central bank is fully covered on the forex front. There should be some value buying opportunities when the yields fall.”
The appointment of Patel, who is generally seen as hawkish, as the RBI Governor may dash hopes of aggressive easing, Japanese investment firm Nomura had said on Sunday. “Under Dr Patel, the RBI will maintain its cautious stance (much like Governor Rajan’s tenure) particularly in light of the recent firm inflation prints,” said Radhika Rao, economist, DBS Bank.